Lenders temper expectations as affordability pressures cut into demand

Pessimistic expectations on profit margins persisted in the third quarter of 2018 as lenders faced increased competition and shrinking mortgage demand, according to the latest Mortgage Lender Sentiment Survey from Fannie Mae.

For the eighth quarter in a row, lenders were more likely to expect lower profit margins than higher ones. Forty-one percent of respondents said they expect their profits to decrease in the next three months while 21 percent said they believe their profits will increase.

Seventy-one percent of those who said they expect lower profits said they think competition from other lenders will affect their margins. Thirty-seven percent cited consumer demand, a survey high and the first time this year that the reason has been one of the top two cited.

Among the lenders who expect higher profits in the next quarter, 64 percent said operational efficiency such as technology improvements would help them. Forty-four percent said a reduction in staffing or personnel costs would improve their profit margins.

With mortgage rates continuing to rise, lenders said demand for refinance mortgages was depressed. Higher home prices and affordability pressures were also affecting purchase mortgage demand, which fell to its lowest third quarter level in the survey's five-year history. Despite these challenges, fewer lenders said they were easing their credit standards to try to attract business.

"This may suggest the realization among lenders that combatting declining affordability by making it easier to obtain mortgages might not be the answer – or simply that there is little room for additional easing going forward," said Doug Duncan, senior vice president and chief economist at Fannie Mae.

A net share of 22 percent of respondents said there had been increased demand for GSE eligible purchase mortgages—those available through government-sponsored enterprises like Fannie Mae and Freddie Mac—in the past three months, down from 34 percent in the third quarter of 2017. Twenty-six percent on net said non-GSE eligible purchase mortgage demand was up, a year-over-year drop of 8 percentage points. A net share of 8 percent said there was higher demand for government-backed loans, down 18 percentage points from the previous year.

Lenders were split on their expectations for the near future but were slightly more likely to expect a drop in demand. A net share of 4 percent said they think demand for government-backed purchase loans will go down, while 2 percent expected a decline in GSE eligible purchase mortgages and 2 percent said they think non-GSE eligible loan demand will increase. In the third quarter of 2017, a net share of 17 percent of lenders said they thought GSE eligible loan demand would increase, while 15 percent thought non-GSE eligible loan demand would be up and 12 percent thought government-backed loan demand would increase.

Few lenders reported an uptick in refinance activity. A net share of 73 percent said demand for government-backed refinance mortgages was down, while 69 percent said there was less demand for GSE eligible refinance demand and 56 percent said fewer people were looking for non-GSE eligible refinance loans. Lenders have reported lower levels of refinance activity across all loan types since the end of 2016.

Lenders also did not expect an increase in refinance mortgage demand at the end of the year. On net, 52 percent said they expect both GSE eligible and government-backed refinance demand to fall, while 46 percent said they think non-GSE eligible mortgage demand will decrease.

Fannie Mae said the share of lenders reporting an easing of credit standards for GSE eligible and government loans was less than half of the peak shares reached at the end of 2017. On net, 11 percent of lenders said they have eased standards for GSE eligible loans – down 14 percentage points from the third quarter of 2017. The net share of lenders saying they had eased standards for government loans fell from 12 percentage points to 6 percent, while 18 percent said they have eased standards for non-GSE eligible loans – down 1 percentage point from the previous year.

Looking ahead to the next three months, a net share of 8 percent of lenders said they expect to ease credit standards for GSE eligible mortgages – half the share indicating the same in the third quarter of 2017. The share of lenders reporting an expected easing of standards for government loans in the near future fell from 9 percent to 4 percent. Ten percent of lenders said they expect to ease standards for non-GSE eligible loans, unchanged from the third quarter of 2017.

Despite the dip in demand and persistent expectations for lower profits, most lenders continued to view the American economy favorably. Eighty-three percent said they consider the economy to be on the right track, up 2 percentage points from the previous year. Eight percent said they think the economy is on the wrong track, a year-over-year drop of 2 percentage points.

Sixty-one percent of respondents said they expect home prices to continue rising in the next 12 months, down 7 percentage points from the third quarter of 2017. The share of lenders expecting prices to fall rose from 5 percent to 9 percent. Twenty-nine percent said they think home prices will stay the same, up 2 percentage points from the previous year.

For the third straight quarter, lenders were more likely than not to think it was easy to get a mortgage. Fifty-two percent held this opinion, a year-over-year increase of 11 percentage points. Forty-seven percent said they thought it would be difficult to get a mortgage, down 12 percentage points from the third quarter of 2017.

A total of 195 senior executives were polled for the third quarter Mortgage Lender Sentiment Survey. These respondents represented 184 lending institutions of varying sizes.

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